The best performing stock markets in the world are in the Middle East this year

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Foreign investors are pumping money into a Persian Gulf stock market boom, as energy-rich monarchies turn their huge government entities into state-owned enterprises and a rise in oil prices fuels interest in the region.

Once the home of national oil companies and sleepy family businesses, the region is now the world’s only bright spot for IPOs in a listings market elsewhere crippled by war in Ukraine and concerns over global economic growth.

The last time oil rose above $100 a barrel in 2014, the Saudi stock market was not open to foreign buyers, few of the biggest oil companies or companies were listed on the stock exchange, and international investors largely ignored trading in the region. Today, oil at $100 a barrel helped make the stock markets of Saudi Arabia and Abu Dhabi two of the best performers in the world this year, both up more than 19%, according to FactSet.

More than $7 billion in foreign capital flowed into Middle Eastern stocks in March, a record month, according to investment firm Franklin Templeton.

“The Middle East is in an ideal position,” said Rami Sidani, head of frontier markets at Dubai-based Schroders PLC. “We have investors coming to the region looking for one of the best emerging market oil exposures.”

So far this year, the Middle East has been the only region in the world to record an increase in the value of public listings in the first quarter compared to the same period last year, driven by equity sales in Saudi Arabia and the United Arab Emirates, according to research firm Dealogic.

Across 15 deals, companies raised nearly $10 billion from IPOs in the year to April 19, up from $300 million in the same period last year, propelled by governments privatizing public companies. Europe, on the other hand, has raised $3.7 billion so far this year.

This month, Dubai, the commercial hub of the United Arab Emirates, raised $6.1 billion by listing part of the emirate’s water and electricity utility, the largest IPO in the world. the region since oil giant Aramco sold $25.6 billion worth of shares in 2019.

The emirate’s government had planned to list just 6% of the Dubai Water and Electricity Authority, or DEWA, ​​but tripled the number of shares available after seeing global interest, including from investors. US asset managers BlackRock Inc.

and Vanguard Group, as well as sovereign wealth funds from Norway and Singapore, according to people familiar with investors.

The boom is not limited to the traditional sectors of energy and finance. Recent Saudi listings include a pharmacy company, a food delivery app and a company that runs cold stores. Real estate development companies and water bottlers are expected to follow soon.

In the rest of the world, IPO activity fell or was flat in the first three months of the year, according to Dealogic, with bankers citing the fallout from the war in Ukraine, rising interest rates interest and warnings of an impending global recession. .

A ticker at the Dubai Financial Market stock exchange showed the values ​​of stocks including the Dubai Electricity and Water Authority this month.


Photo:

Giuseppe Cacace/Agence France-Presse/Getty Images

Rising inflation, a drop in oil prices or a global economic slowdown could dampen the good times for the Gulf market. National governments will retain control of many companies that go public, limiting the influence of new shareholders and increasing the possibility that companies will prioritize state policies over the interests of investors. Some investors also remain wary of a region where high-profile corporate scandals, including at private equity firm Abraaj Group and hospital operator NMC Health PLC, have burned foreign buyers.

Yet the Persian Gulf petrostates are among the few short-term beneficiaries of a higher oil price, which, coupled with regulatory changes aimed at encouraging companies to register, is producing a coming-of-age moment. adult, said bankers and investors.

“There’s not a lot of activity around the world,” said Samer Deghaili, head of capital markets for the region at HSBC PLC. “The Middle East is rising.”

Investors managing funds dedicated to emerging markets are moving capital to the Middle East from countries that were once investment magnets but are now facing turbulence, bankers and investors said. Russia’s invasion of Ukraine caused market index compilers such as MSCI Inc.

and FTSE Russell to remove it from their emerging markets trackers. A government crackdown on the tech sector has spooked investors in China, and the recent economic crisis in Turkey, another major emerging market, has made it a less attractive place to invest.

The Gulf is “increasingly seen by investors as the only viable play in emerging markets,” said Andree Chakhtoura, head of investment banking in the region at Bank of America..

At the center of the region’s emergence is the government policy aimed at strengthening financial exchanges and liquidating stakes in state-owned enterprises. The governments of the United Arab Emirates and Saudi Arabia, in particular, have announced major economic overhauls and are investing proceeds from the IPO to revive non-oil sectors.

Competition also plays a role: Riyadh, Dubai and Abu Dhabi are all pushing companies to list on the stock exchanges in those cities, each vying for money from global investors.

“It’s healthy for investors. It offers a bigger universe, more investment opportunities in the Gulf,” said Fadi Arbid, co-founder and chief investment officer of the Riyadh-based alternative asset manager and Dubai, Amwal Capital Partners.

Saudi Crown Prince Mohammed bin Salman has said he wants the country’s stock exchange, the Tadawul, already by far the largest in the region with a market capitalization of over $3 trillion, to become one of the biggest. major stock markets in the world. Its efforts to attract direct investment from foreign companies, which involves greater exposure to local politics, have encountered major obstacles.

The Saudi government is expected to sell more Aramco in the local market, and the country’s sovereign wealth vehicle, the Public Investment Fund, is encouraging companies in which it has stakes to list. The latest example: digital security firm Elm raised over $800 million for PIF in February.

In total, the Saudi stock exchange received applications for 50 IPOs this year, although not all of them are likely to be listed, according to Franklin Templeton.

“We had an outstanding quarter in terms of emissions,” said Salah Shamma, Franklin’s regional equity manager. “This will continue until the end of the year.”

The seeds of the current IPO boom were sown in 2015 when the Saudi kingdom opened its market to foreign investors and Prince Mohammed later said he would list part of Aramco.

A flood of money poured into Saudi Arabia in 2019 when MSCI and FTSE Russell added the country to their emerging market indexes. The government then encouraged families and owners to list businesses by offering incentives, such as preferential treatment on government contracts. Abu Dhabi and Dubai followed suit.

The result is that every market now has more companies listed and in a much wider range of industries than before.

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Write to Rory Jones at [email protected] and Stephen Kalin at [email protected]

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